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4 years ago
Texas power retailers face tight supply, higher $5,000 price cap
June 4, 2013 / 8:02 PM / 4 years ago

Texas power retailers face tight supply, higher $5,000 price cap

* Texas real-time price cap up from $3,000 last summer

* Generators could benefit, retailers could be exposed

* Grid agency preparing for tight supply this summer

By Eileen O'Grady

HOUSTON, June 4 (Reuters) - Companies that sell electricity to homes and businesses in Texas face paying 66 percent more for wholesale power during times of extreme heat this summer if supplies are thin after regulators raised the wholesale price cap to $5,000 per megawatt-hour.

The increase in the price cap for real-time power - used to balance supply and demand - to $5,000 per MWh went into effect June 1, up from $3,000 for much of last summer.

Power-plant owners stand to benefit from the higher price cap. But, it threatens to hurt electric retailers that may be unable to pass on higher costs because many consumers are protected from price volatility by fixed-rate contracts.

For retailers, "the potential is certainly frightening," said Jim Reynolds, principal of Power & Gas Consulting LLC of Houston. "You could go out of business in a day."

Retailers buy most of the power they need through bilateral contracts or in the day-ahead market, but when weather unexpectedly boosts demand, they are forced to buy in the real-time market. Prices that are typically less than $50 most hours of the day can quickly soar to the maximum if supply dwindles.

Price volatility in 2008 forced three small retailers to default and a fourth to declare bankruptcy, forcing the grid operator to transfer more than 35,000 customers to new suppliers.

Raising the real-time power price cap is only one part of an ongoing push by the Texas Public Utility Commission to encourage investment in new power plants to supply the state's $35-billion wholesale market where electric demand is growing faster than generation is being built.

Texas regulators raised the cap to $4,500 per MWh last August but it was only hit briefly due to fairly mild late summer and winter weather.

The cap will climb to $7,000/MWh in 2014 and to $9,000 in 2015.

The Electric Reliability Council of Texas (ERCOT), which oversees the grid for most of the state, is preparing for a summer with the lowest power surplus in more than a decade.

ERCOT's power reserves - the minimum capacity needed to cushion against extreme weather or unplanned outages - will fall below 9 percent this summer if expected hotter-than-normal weather has residents and businesses running air conditioners for long periods to stay cool.

The past three summers rank among the top 15 hottest summers in Texas since 1895, said ERCOT meteorologist Chris Coleman.

This summer is not expected to be as hot or as dry as 2011 when a protracted heat wave and drought across the state pushed power demand to an all-time record of 68,305 MW in early August.

Coleman expects Houston, the state's largest city, to see normal temperatures this summer while the rest of the state will likely see above-normal temperatures, with the most extreme weather expected north of the Dallas-Fort Worth area.

The tight summer outlook raises the prospect for frequent calls for residents to reduce energy use during hot afternoons and for possible rolling outages, the grid agency said.

"The bottom line is we do believe there is a potential for emergency alerts this coming summer based on our view of the weather forecast," ERCOT President Trip Doggett told the ERCOT board last month.

NRG Energy, the second-largest owner of power plants in Texas and an electric retailer, has taken steps to position its wholesale and retail portfolios "to benefit from what we believe is going to be a very tight summer in Texas," said Mauricio Gutierrez, NRG's chief operating officer on a call with analysts.

"There have been significant changes from last summer in terms of higher price caps and changes in the real-time price formation rules that should lead to higher and more frequent scarcity prices," said Gutierrez.

While weather is a major driver for electric use, companies also see signs of economic growth that could boost demand.

Thad Hill, president of Calpine Corp, another large generation owner in Texas, said "load growth feels a lot better than the low-growth case" used by ERCOT in its load projections.

Hill told analysts that a 4-percent jump in off-peak, or evening, power demand "potentially signals a strong growth in industrial production here on the Gulf Coast."

Some sparsely populated areas of the state where electric use was stagnant now see significantly higher demand as oil and gas companies extract new energy resources from shale formations.

ERCOT expects peak power demand to reach 68,383 megawatts this summer, slightly above the 2011 record.

In Texas, one megawatt is enough electricity to power about 200 homes when electric use is highest.

Other generation owners in the state include Luminant, a unit of Energy Future Holdings (EFH), which is owned by Kohlberg Kravis Roberts & Co LLP and several private equity firms; NextEra Energy Inc and Exelon Corp.

Other major retail suppliers in ERCOT include units of EFH, Exelon, Centrica Plc and Dominion Resources.

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